A blog dedicated to commentary, technical analysis, and the general machinations of the global gold and silver bullion markets with additional commentary on the global economy and related commodity markets.

Tuesday, January 12, 2010

Chinese Dollar Peg On The Ropes?

Inflation returns to ChinaInflation returned to China last month after nearly a year of declining prices, presenting a potential headache to policymakers as they try to consolidate a strong economic recovery.

A series of data published on Friday indicated that the rebound remained firmly on track, with industrial production and imports both increasing well in advance of forecasts.One of the main risks to face the economy is a surge in inflation as a result of the massive monetary and fiscal stimulus measures introduced this year.Consumer prices rose 0.6 per cent last month from a year ago, after falling 0.5 per cent the month before, while prices at the factory gate fell 2.1 per cent last month compared with a 5.8 per cent decline the month before.Several economists argued that the shift back to inflation was caused specifically by rising food costs, as well as by some rises in energy prices, rather than as a result of the money supply increasing at an annual rate of nearly 30 per cent.

Probably the single biggest reason China has seen inflation rear it's ugly head is the Renminbi's peg to the US Dollar. The US Dollar is exporting inflation globally. By maintaining their peg to the Dollar, the Chinese are "inviting" inflation to their shores. Should China be forced to end their currency's peg to the Dollar to fight inflation on the Chinese Mainland, it will be a very dark day for the US Dollar.

A rising Chinese currency will heap massive pressure on the Dollar as the Chinese will be forced to dump their Dollars. This in turn will swamp a world already flooded with Dollars. A currency "event" of this nature could well be the catalyst that launches hyperinflation in the US Economy. Today's moves by the Chinese central bank to raise the reserve requirements of its banks is really gold positive despite today's knee-jerk reaction in the markets. Chinese central bankers are doing what is best for their economy in the hopes that they will prevent the economic calamity that the West unleashed on the World in 2008.China raises bank reserve requirementsChina has increased the amount banks must set aside as reserves in the clearest sign yet that the central bank is trying to tighten monetary conditions amid mounting concerns of overheating and inflation as a result of the credit boom.

The People’s Bank of China also raised interest rates modestly in the inter-bank market on Tuesday for the second time in less than a week, as it engages with commercial banks in a tug-of-war over rapid lending.Reserve requirements were raised by 0.5 percentage points, while rates on one-year paper increased by 0.08 per cent and on three-month paper by 0.04 per cent.The central bank is facing a number of worrying signals about inflationary pressures, including a rapid expansion of money supply with M1 increasing by 34.6 per cent in December year-on-year.Two leading economists warned this week of the risk of inflation and said that the economy could grow by 16 per cent this year if the government did not withdraw some stimulus.http://www.ft.com/cms/s/0/c49c6b12-ff82-11de-8f53-00144feabdc0.html

Mixed dollar action as traders react to China's lending changesNEW YORK (MarketWatch) -- The dollar advanced against the Australian dollar and other high-yielding currencies Tuesday, but was little changed against the euro, after the People's Bank of China said it would require banks to hold more cash in reserve as it attempts to restrain credit growth.

The dollar index wavered between positive and negative territory during the session, and recently traded at 77.018, off from 76.991 in late North American trading Monday. The index gauges the performance of the greenback against a trade-weighted basket of six major currencies. A number of factors resurrected a move by investors away from assets considered risky, including stocks and commodities, and into the perceived safety of the dollar and government bonds.

Besides the developments out of China, there were reports of more concerns about Greece's financial status and disappointing quarterly results reported by U.S. blue chip Alcoa.

The dollar dipped its toe into negative territory against the euro during the session amid some weak second-tier data in the U.S. and shifting of positions, analysts said. Separately, the Labor Department said the number of unemployed people per U.S. job openings rose to the highest on record in November. Coupled with other data, "it seems that the U.S. economy is far from a period of consistent job creation," said David Watt, senior fixed income and currency strategist at RBC Capital Markets. "I think the U.S. dollar just has a heavy undertow and that it takes a lot of effort to keep it afloat, despite some dreadful news on other currencies."http://www.marketwatch.com/story/dollar-holds-gains-vs-euro-but-slips-vs-yen-2010-01-12

“Gold's decline has a lot to do with China's raising reserve requirements. It was massive liquidation after prices fell below important technical levels,” said Bruce Dunn, vice-president of trading at New Jersey-based Auramet.Technical selling dragged prices lower after spot bullion fell below its 50-day moving average at $1,130, analysts said. Support could be seen at its 100-day moving average at $1,074 an ounce.China took its strongest step towards tightening monetary policy with an increase in banks' required reserves. The move came just days after China reported robust trade figures and was the first time that the central bank had adjusted the ratio since a cut in December, 2008.

Many will imply that "rising interest rates" will halt Gold's rise. Not so fast I would suggest. Only if interest rats rise faster than inflation will interest rates interrupt Gold's rise. Today's dumping of Gold was absolute folly. Chinese efforts to slow their nations rate of growth have seldom amounted to much of a dent in their nation's growth rate. China will remain a world leader in growth prospects despite today's token gesture to reining in growth. If anything, China's announcement today only reaffirms Gold's status as the "global currency of choice.

John Hussman of the Hussman funds came out recently with this commentary. This man is much admired and followed :

"As I wrote several weeks ago, the Federal Reserve has expanded the U.S. monetary base by more than 150% since the beginning of the recession. That is not a typo. The monetary base has soared from $800 billion to over $2 trillion. Much of this has been accomplished through outright purchases of mortgage-backed securities (not repurchases) and an equivalent creation of base money. Unless these securities can be sold back out into private hands for the same value that was paid to acquire them, the Fed will have effectively forced the U.S. government to make its implicit guarantee of these agency securities explicit, without the authorization of Congress. To the extent that the underlying mortgages default, the U.S. government will be forced to issue additional Treasuries to retire the mortgage backed securities now held by the Fed. Alternatively, if the U.S. does not explicitly bail out Fannie Mae and Freddie Mac to the full extent, the Fed will have created money, with no recourse, and without the equivalent backing of assets or securities on its books. In short, the Fed is now engaging in unlegislated, back-door fiscal policy." "What is likely, in my view, is that we will observe far greater issuance of government liabilities, which will predictably create a near doubling of the consumer price index in the coming decade (though probably not for a few years due to credit concerns, which dampen monetary velocity). It is notable that the massive expansion of government liabilities beginning in the late-1960's eventually exploded into uncontrollable inflation by the late 1970's. There are lags between the creation of government liabilities and their inflationary effects. But to expand these liabilities as recklessly as the Fed and Treasury are now doing is to undermine the long-term foundations of the economy."And therein lies the foundation of support in the Gold price. The Chinese can tinker with their interest rates and bank reserve requirements all they want, but is the continuing debasement of the US Dollar by the Federal Reserve and the US Treasury that guarantee the price of Gold is going to rise substantially going forward in time. There is no "safety" in the US Dollar and US Treasury's no matter the "perception" to the contrary.